ABBOTT (LABORATORIES) PAKISTAN LIMITED – Analysis of Financial Statements – Financial Year 2004 – Financial Year 2010

Abbott Laboratories is a highly diversified global healthcare company devoted to the discovery, development, manufacture and marketing of pharmaceutical, nutritional and medical products, including devices and diagnostics.

The company is principally engaged in the manufacturing, import and marketing of research-based pharmaceutical, nutritional, diagnostic, hospital and consumer products and in providing toll-manufacturing services. These activities are segregated into three divisions: pharmaceuticals, nutritional and others. Pharmaceutical accounts for 85% of turnover.

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COMPANY SNAPSHOT
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Name of company Abbott (Laboratories) Pakistan Limited
Nature of Business Pharma and Bio-tech
Ticker ABOT
Net Sales FY’10 Rs.10,995,701,000
Net Sales FY’09 Rs.8,431,080,000
Profit After Taxation FY ’10 Rs.825,676,000
Profit After Taxation FY’09 Rs.1,176,944,000
Share price (avg. over Jan’10-Dec’10) Rs.95.50 per share
Market Capitalization as on 31st December 2010 Rs.9,349,478,650
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With over 70,000 employees worldwide and a global presence in more than 130 countries, Abbott is committed to improving people’s lives by providing cost-effective healthcare products and services that consistently meet the needs of its customers. Abbott Pakistan is part of the global healthcare corporation of Abbott Laboratories, Chicago, USA.

Abbott started operations in Pakistan as a marketing affiliate in 1948; the company has steadily expanded to comprise a work force of over 1500 employees. Its shares are quoted at all the three stock exchanges of Pakistan. It has the honor of being the first pharmaceutical company in Pakistan to achieve Class-A certification by a world-renowned organisation, Messrs Oliver Wight. The company has also pioneered the concept of disease specific nutrition in Pakistan through introduction of specific products.

Abbott Pakistan has leadership in the field of pain management, anesthesia, medical nutrition, anti-infectives and diagnostics. Their wide-range of products is managed and marketed through four marketing arms. The Diagnostic Division operates from its office located at Korangi, Karachi. With leading products in several key segments of the diagnostic market, sales and support staff are available in all the major cities of the country.

A continuous process of innovation, research and development at Abbott’s worldwide facilities enables Abbott Pakistan to offer effective solutions for various healthcare challenges, with products and services that are well focused, within the customer’s reach and contribute to improved health care of the people of Pakistan. Currently two manufacturing facilities located at Landhi and Korangi in Karachi continue to use innovative technology to produce top quality pharmaceutical products.

INDUSTRY ANALYSIS

At the time of independence in 1947, there was hardly any pharma industry in the country. Today Pakistan has about 370 pharmaceutical manufacturing units including those operated by 30 multinationals present in the country.

The local companies can be classified into three categories:

1. Manufacturing Units

2. Importers that import drugs in finished form

3. Franchisers

The Pakistan Pharmaceutical Industry meets around 70% of the country’s demand of Finished Medicine. The domestic Pharma market, in term of share market is almost evenly divided between the Nationals and the Multinationals. More than 100 local companies are represented by the umbrella Pakistan Pharmaceutical Manufacturers Association (PPMA), with multinationals organised by the Pharma Bureau.

According to the PPMA’s figures, the domestic industry is responsible for an estimated 70-85% of the total market in terms of volume and some 55% in terms of value – although the 2006 figures have since shifted further in favor of domestic production. In 2008, retail sales account for more than 80% of the market, with healthcare institutions responsible for the remainder. The breakup of the pharmaceutical market by sub sector shows that in 2009, US $1.067 billion of generic drugs was consumed, followed by US $0.319 billion of OTC medicines and US $0.231 billion of patented products.

As shown, the pharma industry has shown robust growth, particularly over the last one decade. It has over the years invested largely towards improving its manufacturing practices and follows Good Manufacturing Processes (GMP) as widely known internationally. Currently the industry has the capacity to manufacture a multiplicity of products ranging from simple pills to sophisticated Biotech, Oncology and Value Added Generic compounds.

Nevertheless the tremendous growth in the industry hasn’t yet assured easy and inexpensive availability of medicines to the poor and deprived of the country. Clearly this presents a prospect, however a lot needs to be done with partnership of government with the pharma manufacturers.

As shown, the spending on healthcare as a percentage of GDP is 1.73%, well below both the regional (5.12%) and global (7.14%) averages. By 2014, forecasts of healthcare spending as a percent of GDP are expected to reach 2.01%. Per capita healthcare spending was a paltry US $17 in 2009. The majority was out-of-pocket expenditure because there is no comprehensive health insurance scheme and the government has minimal involvement in the sector. In 2009, public sector healthcare spending reached US $440mn, which equated to 15.9% of the total market. The regional and global averages for this indicator are 47.5% and 59.5% respectively.

Like most developing countries, Pakistan has negative pharmaceutical trade balance as shown. According to UN, the country imported finished medicines with a value of US $252mn in 2008.The leading countries of origin were Switzerland (US $54.7m), China (US $29.5m), Germany (US $27.6m), the UK (US $17.6m) and France (US $16.1m).

The Pakistan pharma industry is relatively young in the international market. Pakistan Pharma Industry boasts of quality producers and many units are approved by regulatory authorities all over the world. Like domestic market the sales in international market have gone almost double during last five years. The pharma industry is focusing to an Export Vision of USD 500 million by 2013. In the meantime, exports are also likely to be boosted by new regional and global opportunities. Presently, main export destinations are Central and South-East Asia and Africa.

RECENT PERFORMANCE (FY10)

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Rupees in 000s FY’09 FY’10 % Change
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Net Sales 8,431,080 10,995,701 30.42
Cost of Goods Sold 5,987,872 7,308,663 22.06
Gross Profit 2,462,246 3,687,038 49.74
Selling, Distribution
and Administrative Expenses 1,137,813 1,869,016 64.26
Operating Profit 1,324,433 1,818,022 37.27
Other Income 141,890 109,079 -23.12
Other Charges 132,246 182,314 37.86
EBIT 1,334,077 1,744,787 30.79
Interest Expense 2,525 3,530 39.80
Profit/Loss Before Taxation 1,166,097 1,741,257 49.32
Tax Expense 340,421 564,313 65.77
Profit/Loss AFTER TAXATION 825,676 1,176,944 42.54
EPS 8.43 12.02 42.59
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(This income statement analysis is based on the 12-month income statement Nov’08-Nov’09 and the subsequent 13 month income statement ie November 2009-December 2010. This discrepancy arose because Abbot Laboratories changed its fiscal year end to December, in accordance with the reporting standards of the parent holding company, Abbott International LLC, USA.)

Net sales increased by 30.42% from Rs. 8.43 billion in FY09 to Rs. 11.0 billion in FY10, mainly attributable to increased sales volume, favorable product-mix and limited price adjustments. Thus Abbot Laboratories crossed its Rs. 10 billion sales benchmark, highlighting the excellent performance of the company. Abbott Pakistan achieved a market share of 6.1% as per IMS (December 2010, 12 Months) in the pharmaceutical and nutrition market (2009 market share: 5.8%).

Cost of goods sold increased by 22.06% from Rs. 5.99 billion in FY09 to Rs. 7.31 billion in FY10, on account of inflationary pressures, increased energy tariffs, and increase in the cost of imported pharmaceutical constituents due to depreciation of rupee in FY10. As a result, gross profit posted a growth of 49.74% from Rs. 2.46 billion in FY09 to Rs. 3.69 billion in FY10.

Selling, distribution and administrative expenses increased significantly by 64.26%in the restrictive economic environment, leading to a net 37.27% increase in operating profit from Rs. 1.32 billion in FY09 to Rs. 1.82 billion in FY10. Coupled with a 23.12% decrease in other income and a 37.86% increase in other charges, this led to an overall 30.79% increase in EBIT from Rs. 1.33 billion in FY09 to Rs. 1.74 billion in FY10.

Finance cost increased by 39.80% due to increase in bank charges on short-term financing needs. Taxation increased by 65.77% over FY09-10. This led to a net 42.54% increase in profit after taxation from Rs. 826 million in FY09 to Rs. 1177 million in FY10. This strong performance was reflected in the EPS, which increased by 42.59% from Rs. 8.43 per share in FY09 to Rs. 12.02 per share in FY10.

SEGMENTAL PEFORMANCE

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Rupees in 000s FY’09 FY’10 % Change
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Pharmaceuticals
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Sales – net 6,765,361 8,687,289 28.41
Cost of goods sold 4,783,743 5,823,315 21.73
Gross profit 1,981,618 2,863,974 44.53
Selling and distribution
and administrative expenses 1,143,219 1,411,497 23.47
Segment result 838,399 1,452,477 73.24
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Nutritional
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Sales – net 970,763 1,353,654 39.44
Cost of goods sold 803,628 866,528 7.83
Gross profit 167,135 487,126 191.46
Selling and distribution
and administrative expenses 196,501 242,453 23.39
Segment result -29,366 244,673 933.18
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Others
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Sales – net 713,994 954,758 33.72
Cost of goods sold 541,616 618,820 14.25
Gross profit 172,378 335,938 94.88
Selling and distribution
and administrative expenses 115,033 215,066 86.96
Segment result 57,345 120,872 110.78
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Segment-wise performance shows that nutritional segment registered the highest sales growth of 39.44% over FY09-10 as well as the highest profits growth of 933.18% due to recovery from the loss situation in nutritional segment in FY09. The others segment, which includes diagnostic products, witnessed a 33.72% sales growth and a 110.78% profits growth over FY09-10. The pharmaceutical segment, the largest segment at Abbott Laboratories, recorded a stable growth of 28.41% in sales and 73.24% growth in profits over FY09-10.

The net sales breakup of the company shows that 79.01% of the sales are contributed by pharmaceuticals segment, followed by nutritional segment at 12.31% and others segment at 8.68%. This trend is likewise reflected in the profit breakup, with 79.89% of the profits contributed by pharmaceuticals, 13.46% by nutritional and 6.65% by others. This indicates that each of these segments is equally profitable for Abbott Laboratories, and the company has a strong position in each of these segmental markets.

STOCK PERFORMANCE

Stock returns of weekly continuously-compounded returns over January-December 2010 shows that the standard deviation of these stock returns is 3.65%. The future stock returns are expected to vary with a standard deviation of 3.65% and have been fairly volatile over the period with a trend towards positive volatility, indicating the positive returns to be expected from Abbott stock.

Beta analysis of the company stock over January-December 2010 shows that the beta of Abbott Laboratories Pakistan Ltd is relatively high at 0.80, as given by the slope of the trend line. This indicates that the stock is reflective of KSE-100 performance and high returns are to be expected, in line with the steady positioning of the company in the pharmaceutical sector, with its presence and expertise second only to GSK.

OPERATING PERFORMANCE (FY04-10)

The net profit margin increased from 9.79 in FY09 to 10.71 in FY10, indicating the improving profitability performance of the company. The gross profit margin increased even more, from 29.2 in FY09 to 33.53 in FY10, thus giving proof of the well managed cost of goods sold at Abbott Laboratories, despite the negative economic outlook of the pharmaceutical sector.

Return on assets increased from 16.63 in FY09 to 20.33 in FY10 due to the 42.54% increase in net profits, compared to 16.63% increase in total assets. The increase in assets was driven by a 23.56% increase in stock in trade as well as significant increases in short and long-term advances, deposits and prepayments. Return on equity likewise increased from 25.50 in FY09 to 30.08 in FY10, since the increase in equity over FY09-10 was 20.81%. The increase in equity was driven by 13.41% increase in capital reserves and a 31.20% increase in revenue reserves.

The liquidity position of the company improved over FY09-10 since the current ratio increased from 2.03 in FY09 to 2.19 in FY10 due to an 18.33% increase in current assets compared to a 9.72% increase in current liabilities over FY09-10. The increase in current assets was mainly due to 23.56% increase in stock in trade, 217.05% increase in loans and advances and 48.03% increase in deposits and prepayments, whereas the current liabilities increased solely due to increase in trade payables.

However, the quick ratio increased by a smaller amount from 0.94 in FY09 to 1.01 in FY10. This shows that the major proportion of increase in current assets, which contributed to the improvement in liquidity position, was the stock in trade of the company. Since, stock in trade is not considered an easily liquidated asset, hence the liquidity position of Abbott Laboratories remained almost stable over FY09-10. However, the current and quick ratios are both above the 1.00 benchmark, indicating the well managed liquidity position of the company.

The inventory turnover ratio decreased from 71.52 days in FY09 to 67.76 days in FY10. This indicates better inventory management at Abbott Laboratories. Although the inventory holding increased significantly by 23.56% over FY09-10, the 30.42% growth in sales was sufficient to justify this inventory buildup. However, day sales outstanding increased from 36.00 days in FY09 to 41.77 days in FY10 which is a sign of declining efficiency in settlement of the receivables of the company. Trade debts increased by 12.42% over FY09-10. Thus the operating cycle increased marginally from 107.52 days in FY09 to 109.53 days in FY10. The inventory/receivables management efficiency of the company thus remained almost the same in FY10.

Total asset turnover increased from 1.70 in FY09 to 1.90 in FY10 due to the 30.42% increase in sales compared to 16.63% increase in total assets over FY09-10. This indicates that the high sales level justifies the investment into the assets of Abbott Laboratories. Sales to equity ratio also increased from 2.60 in FY09 to 2.81 in FY10, as sales growth of 30.42% was greater than the 20.81% increase in equity.

Debt to assets decreased from 0.35 in FY09 to 0.32 in FY10 due to 8.79% increase in total liabilities compared to 16.63% increase in total assets. The increase in liabilities was driven by a 9.72% increase in trade payables. Debt to equity also decreased from 0.53 in FY09 to 0.48 in FY10. This shows that the debt incurred by Abbott Laboratories has decreased in FY10, which is an indicator of Abbott’s ability to finance its operations without having to raise funds from external sources. The healthy buildup of reserves at Abbott Laboratories is a low cost source of obtaining funds for investment into the plant and equipment. However, it also implies decreased use of leverage, which may lead to lower profitability than the profitability achievable from a leveraged balance sheet.

Long-term debt to equity declined from 0.04 in FY09 to 0.03 in FY10. After a peak of 2.99 in FY07, long-term debt to equity has declined to almost nil since Abbott Laboratories is not engaging any long-term financing. Times interest earned decreased from 528.35 in FY09 to 494.27 in FY10 due to the 39.80% increase in interest expense over FY09-10, compared to a lesser 30.79% increase in EBIT. Although it has witnessed a decline, the times interest earned is still at a healthy level and indicates the strong credit rating of the company in terms of meeting its interest obligations.

The earnings per share increased from Rs. 8.43 per share in FY09 to Rs. 12.02 per share in FY10, a strong growth of 42.59% resulting from the improved profitability position of the company. However, dividend per share decreased from Rs. 12.00 per share in FY09 to Rs. 5.00 per share in FY10, due to the company’s policy of reserving a larger proportion of its profits for investment into fixed assets.

The book value per share increased from Rs. 33.08 per share in FY09 to Rs. 39.96 per share in FY10 resulting from the 20.81% increase in total shareholder’s equity. Since no further issue of shares took place, this increase in book value per share was solely due the buildup of reserves, ie 13.41% growth in capital reserves and 31.20% increase in revenue reserves over FY09-10.

However, the market price of Abbott’s stock remained almost the same from Rs. 96.50 per share in FY09 to Rs. 95.50 per share in FY10. This shows that the improved financial position of the company was not reflected in investors’ perceptions about the company’s stock, due to the general lack of interest in the equity market, given the risky economic situation prevalent in the country. Thus the price earnings ratio fell from 11.44 in FY09 to 7.95 in FY10, since the EPS grew by an impressive 42.59% but no increase was witnessed in the market price per share.

FUTURE OUTLOOK

Rupee devaluation and inflation are major challenges for the pharmaceutical industry’s profitability. From a business sustainability point of view, there is a need for an across the board price increase of pharmaceutical products, since profit margins of pharmaceutical manufacturers have shrunk greatly in the past few years. Abbott Laboratories along with other members of the pharmaceutical industry continues to pursue the Government for a mutually acceptable pricing mechanism for pharmaceutical products.

In addition, the impending devolution of health ministry to the provinces following the passage of the 18th Amendment has serious implications for the industry. The industry associations ie PPMA and Pharma Bureau are aligned on the need for the formation of a Drug Regulatory Authority at the Federal level to manage Pharmaceutical Registration and Pricing. This is no different to existing structures globally where Drug registration and Pricing are coordinated by one body at a Federal level.

Simultaneously, the Company is also investing in cost improvement initiatives and product portfolio optimization to partially offset the impact of inflation / devaluation. Intellectual Property Rights continues to be a concern for the industry. Concrete efforts need to be undertaken to discourage both piracy and counterfeiting. Effective implementation will protect consumers, as well as the industry.

Abbott recently disclosed plans to invest US $0.75mn in the expansion of its existing plant in the Landhi industrial area of Karachi. The expansion will allow the company to have its facility certified by the US FDA, which will enhance its ability to export to developed countries. The company is working to expand its export market and currently exports to seven countries, with the bulk going to Sri Lanka. The company expects a significant increase of exports to African and Asian countries.

However, given that patients remain responsible for the full cost of pharmaceuticals dispensed in the public sector, economic fluctuations and variations in consumer purchasing power will have a direct impact on drug market revenues and volumes – as will the government’s focus on necessary cost containment. In addition, exports could be harmed by high inflation, which would lead to an appreciation of the real exchange rate, resulting in exports becoming less competitive and imports becoming relatively cheaper.

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